U.S. economic data for the week was generally positive and consistent with an ongoing moderate economic expansion through the fourth quarter of 2016.
A middling 156,000 net new jobs were added to the U.S. economy in December. Over 2016, an average of 180,000 net new jobs were added per month, stepping down from the robust +200K per month averages of 2014 and 2015. The unemployment rate increased inconsequentially by one-tenth to 4.7 percent for the month. This should be interpreted as noise and not as a sign of increasing slack in the labor market. The average workweek was unchanged at 34.3 hours. Wages jumped noticeably, up 10 cents, or 0.4 percent for the month, after falling slightly in November. Over the previous 12 months, average hourly earnings were up by 2.9 percent. With many states boosting their minimum wage rates this year, wages will be under pressure.
The Fed will watch wage growth carefully over 2017, looking for signs that wage gains are fueling increasing inflation expectations. According to the December dot plot, FOMC members are expecting about three increases in the fed funds rate this year. The fed funds futures market shows that expectations are coalescing around June 14 for the next fed funds rate hike. Perhaps the remaining two could come in September and December, implying a back-loaded schedule. However, the Fed is not wedded to that schedule. If inflation measures warm up quickly, rate hikes will come sooner rather than later.
The minutes of the Federal Open Market Committee meeting of December 13/14 show FOMC member’s contemplating and struggling to integrate changing expectations for 2017.
Quantifying and sequencing the potential policy levers that the incoming Trump Administration may pull is still challenging, but it is safe to say that most potential economics-related policies would marginally boost inflation. Trump policies will be rolled out on the heels of a production agreement by OPEC members that has already boosted oil prices into the mid-to-low $50 range. Other commodity prices, particularly metals, have also been on the upswing, adding to inflation expectations.
The ISM Manufacturing Index for December increased to a solid 54.7. The ISM Non-Manufacturing Index for December was unchanged at 57.2, showing ongoing improvement in the broad non-manufacturing sector. Noteworthy in both the ISM-Manufacturing and Non-Manufacturing Indexes for December, the price sub-indexes are increasing.
Auto sales in December surged to an 18.4 million unit rate, bringing the 2016 total up to a record 17.54 million units. We expect sales to ease in 2017. Strong December retail sales are supportive of Q4 GDP.
For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 01-06-2017.